Functional foods bring healthy returns

Lots of innovation but new regulations could slow down progress

By

AudeLagorce

LONDON (MarketWatch) -- In a few years it may be the milk jug, rather than the whisky or pill bottle, that people suffering from depression turn to when trying to dull the pain.

At least that's one of the hopes of the many players -- from multinational food giants like Danone (BN) and Unilever
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(ULVR) and specialist dairy groups like Valio to a small army of nutrition scientists -- searching for the next carefully engineered miracle food.

No one knows yet whether it will be a yogurt that helps slow down the progress of Alzheimer's disease or a milky drink that staves off depression. But it will undoubtedly yield its inventor very healthy returns.

Over the past decade the market for cholesterol-lowering spreads, immunity-boosting drinks and other functional foods has flourished as food manufacturers have latched on to the idea of selling food as an alternative to medicine.

It was a tricky proposition at first -- consumers' top criterion when buying food has always been taste -- but soon turned out to make a lot of business sense. In developed markets where basic food items have kept getting cheaper, health-focused innovation would help its biggest proponents reinvigorate margins and gain an edge on competitors.

French dairy and water giant Danone is undoubtedly the first multinational to have grasped the potential of health as a motto and marketing tool, selling yogurt in pharmacies in Barcelona as far back as 1919. During the next decades though, it expanded well beyond yogurts. But then in 2007, convinced it would grow faster if it refocused its portfolio on health, it took a major step and sold its less virtuous biscuit division to Kraft Foods
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It was a return to its roots.

The following year, the title of its annual report read: "Bringing health through food to as many people as possible."

The health obsession: prevention is better than cure

What Danone has latched onto is our growing obsession with treating the body as a temple.

"Like any trend, health first became a focus with the early-adopter group. We're now in the phase where it's in the mainstream, and it's going gangbusters," said Barbara Katz, president of HealthFocus International, a consulting firm specialized in food and nutrition issues.

"Back in the nineties, the focus was on low-fat, low-sugar products. That's how we were defining healthy. Then it became what we were adding rather than what we were taking away: omega 3, calcium, fiber, probiotics," she added.

The reason for the extraordinary success of functional foods and nutraceuticals -- a subcategory that further blurs the line between food and medicine and includes products such as special nutrition-heavy yogurts for the elderly -- is simple.

In developed markets, where the population is aging, life expectancy is rising and the demands of modern life putting many under strains, the notion that eating particular foods enriched in components like antioxidants or fatty acids can help prevent diseases has struck a powerful chord with consumers. Many, after all, would rather eat a fiber-enriched yogurt every day than pop laxatives.

"The whole notion of food for health has certainly taken off. It has a clear purpose for the end customer. It's about avoiding medication and increasing quality of life using natural food products that have always been in the food chain," said Jens Bleiel, head of Food for Health Ireland, a government-backed partnership between Irish dairy companies and universities that promotes research in functional foods.

The food aisles of supermarkets, loaded with immunity-boosting yogurts, antioxidant smoothies and a wide array of dietary supplements, are a testament to the success of the idea that eating the right foods can make us healthier.

For the food companies, and increasingly some of the pharmaceutical ones, ignoring the trend is a risky bet. The global market for functional foods, including sport drinks and dietary supplements, is expected to reach $262 billion in 2012 from $150 billion in 2002, according to Euromonitor. Excluding dietary supplements and drinks, it should still grow to $117 billion in 2012 from $102.5 billion in 2008.

It is the fastest growing food category and has proved particularly resistant to the economic downturn.

The importance of a clear message

Despite the booming demand for products with a health benefit, however, many still fail as companies struggle to communicate a clear message.

Of paramount importance is clear communication unencumbered by too much scientific jargon, said Ewa Hudson, head of health and wellness at Euromonitor. She gave the example of yogurt maker Muller UK, which had to spend 2.5 million pounds re-launching its Vitality brand last year after it found consumers were confused about the laundry list of functional ingredients emblazoned on the earlier packaging.

Danone learnt a similar lesson when it launched two very similar hunger-control yogurts in the U.S and the U.K. In the former, the advertising message for Light and Fit, as the product was called, was detailed and strongly focused on the concept of satiety, which refers to feeling full. Meanwhile in the U.K., it was called Shape and featured a much more concise selling message ("77% of women who eat it snack less") with no reference to satiety.

Light and Fit failed and had to be withdrawn in the summer of 2007. Shape has been selling very well.

"It's very important to have a really simple and clear message. If it's too complicated, even if it's true, it will put customers off," said Hudson.

The difficulty of innovation

Marketing may be a key component of success, but so is innovation.

And in that realm, smaller, narrowly focused firms like Finnish dairy group Valio are giving the big boys like Nestle (NESN) a run for their money.

"Innovation can sometimes be quicker in a smaller company. That's why it's always interesting to keep an eye on the smaller brands in the health section of the store," said HealthFocus' Katz.

Still, scale has its advantages, and larger firms can more easily afford the years of research and development it often takes to develop a new product with a key health benefit.

To address the R&D funding issues at smaller firms, a new category of companies is emerging. They specialize in isolating interesting food components, identifying their properties and making them easy to incorporate into existing products. They can then license the solutions, much as how smaller firms license their drugs to major pharmaceuticals.

"If you really want to develop a new component from scratch, it may take seven to eight years," said Food for Health Ireland's Bleiel. "What you see increasingly is that food companies are embracing the concept of open innovation."

That's why the Irish government is encouraging several of its university research departments to work with domestic dairy companies to develop solutions that can then be sold to other firms to incorporate into their products.

The R&D investment, for firms big and small, can represent quite a drain on cash flow, particularly at a time of economic turmoil, but the rewards of hitting on a successful product cannot be overstated.

Increased regulation looming

Still, the industry has suffered a number of setbacks in recent years.

For a long time, the lack of regulatory guidelines as to the type of research needed to back up health claims meant they would sometimes be disputed and even dismissed as marketing gimmicks.

This is changing, particularly in Europe, with the introduction of strict new regulations on health claims by the European Food Safety Agency.

Danone, which has been run into problems with the advertising of its Actimel pro-biotic drink in the U.K, for instance, said in its latest annual report that it actually welcomes the move, calling it a "step in the right direction" although it forecast that there would likely be quite a bit of to-and-fro at first as the industry learns exactly what authorities expect in the way of scientific documentation.

"The ground rules will in any case become clearer, which will enable businesses that are genuinely investing in science and research to stand out from the crowd with clearly defined claims," it said.

Danone has more than 1,200 research-and-development staff and published more than 80 clinical studies in recent years.

But some industry experts were more pessimistic. Euromonitor's Hudson said the new rules, which are coming into effect this January and require food companies to resubmit all their health claims, could have a damaging effect.

"Any negative publicity, even if a claim has been turned down because of its form rather than content, could discourage consumers from trusting the products," she said.

And a denied claim for one product often damages the whole category as consumers lump all the products together.

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